United Project Consultants Pte Ltd v Leong Kwok Onn

• Jurisdiction: Singapore
• Judge: Lai Kew Chai J
• Judgment Date: 10 December 2004
• Neutral Citation: [2004] SGHC 276
• Docket Number: Suit No 1081 of 2003
• Date: 10 December 2004
• Published date: 10 December 2004
• Year: 2004
• Plaintiff Counsel: Hee Theng Fong and Tay Wee Chong (Hee Theng Fong and Co)
• Citation: [2004] SGHC 276
• Defendant Counsel: N Sreenivasan and Valerie Ang (Straits Law Practice LLC)
• Court: High Court (Singapore)
• Subject Matter: Defendant auditor and tax agent,Whether defendant's breach causing damage suffered by plaintiff,Plaintiff liable for tax and penalty imposed by Inland Revenue Authority of Singapore for failing to make proper IR8A form returns,Breach,Whether defendant breaching such duty,Plaintiff alleging defendant's failure to discover plaintiff's issuance of incorrect IR8A forms and advise plaintiff of tax consequences,Whether defendant auditor and tax agent owing plaintiff duty to discover issuance of incorrect IR8A forms and advise plaintiff of tax consequences,Whether defendant's conduct amounting to breach of contractual duties under contract of retainer,Contract,Whether plaintiff barred from recovering damages by reason of own wrongdoing,Scope of defendant's contractual duties under contract of retainer,Duty of care,Tort,Negligence

10 December 2004 Judgment reserved.

Lai Kew Chai J:

1 The plaintiff, a company which provided engineering services, had to pay the Inland Revenue Authority of Singapore (“IRAS”) the sum of $1.707m being the tax and penalty imposed by IRAS for the failure on the part of the plaintiff to make proper IR8A form returns at the correct times in respect of the declared fees payable to its directors. The plaintiff had retained a part of the declared fees payable to its directors and had paid the directors a part of the fees. The relevant IR8A forms issued by the plaintiff only declared the fees paid and received by the directors. In the books of the plaintiff, the balance was recognised as a sum owing to the directors. At the same time, the plaintiff claimed the whole of the declared fees, whether paid or retained, as a deductible expense. The effect of this accounting treatment in the relevant years of assessment in question is that the plaintiff was able to pay significantly less income tax. The directors paid tax only for the fees received, but not for the fees which were retained by the company as a sum owing to the directors.

2 In this action, the plaintiff is claiming against the defendant, a certified public accountant, for damages which the plaintiff allegedly suffered by reason of the breaches of contractual duties under the contract of retainer or breaches of like duties in tort. In relation to the quantum of damages, the plaintiff gave credit for interest earned on the retained fees over the period in which tax should have been paid thereon. It estimates such interest to be about $295,000. It therefore claims from the defendant the balance sum of $1,412,000 or, alternatively, damages.

3 There are generally four defences. First, the defendant contends that there was in the circumstances no duty in law of the type pleaded, or in general, for him to discover and consequently advise the plaintiff not to breach the Income Tax Act (Cap 134, 2001 Rev Ed) (“the Act”) in relation to the plaintiff’s issuance of the IR8A forms. The second defence is that if there was such a duty, there was no breach. Thirdly, it is contended that if there was such a duty and there was a breach or there were breaches of duties, the breach or breaches did not cause the damage. Finally, the defendant contends that the plaintiff is barred from recovering any damages under the maxim ex turpi causa non oritur actio, ie, a person who suffers damage at the hands of another, but who himself acted in any unconscionable manner, should be deprived of any remedy which the law might otherwise have provided.

Evidence of the plaintiff

4 Approximately towards the end of 1982 or the beginning of 1983, the plaintiff agreed to retain and employ the defendant, it says, as its accountant to audit its accounts and as its “tax agents”. It relies on three documents which set out the contract of retainer. By a letter dated 17 December 1982 the defendant wrote to a firm of accountants intimating that he had been “invited to act as tax agent” for the plaintiff and he requested the firm to let him know whether there were any professional reasons why he should not accept the appointment. Secondly, the plaintiff relies on the fact that the defendant was for the relevant financial years appointed and re-appointed as “auditor” of the company. In that capacity, the defendant had certified that the accounts of the plaintiff were drawn up so as to give a true and fair view of the state of affairs of the plaintiff at the end of the relevant financial year. The third document which the plaintiff relies on is the yearly invoice rendered by the defendant. For example, the invoice dated 7 February 1992 described the nature of the services as “attending to [the plaintiff’s] income tax matters including Form C, schedules and computations, s 44 [of the Act] statements and correspondence for the year of assessment 1992”.

5 At about the same time, Mr Tan See Pian[1] (“Mr Ken Tan”), the managing director and major shareholder of the plaintiff, also engaged the defendant as his personal tax agent to advise on his own tax matters and to prepare all his personal tax declarations including his Form B personal income tax return.

6 Those two contracts of retainers continued until June 2000.

7 From its inception in 1983, the plaintiff adopted the practice of declaring a sum of directors’ fees (“declared fees”) every year. In the books of the plaintiff the declared fees appeared as a global sum. Only a portion, which was usually a small portion, was apportioned (“paid fees”) by Mr Ken Tan; the balance of the declared fees which were not apportioned (“retained fees”) to the directors was retained in the company for rainy days or distribution in future as incentives in recognition of the contribution of deserving directors who were high fee earners.

The accounting treatment

8 The financial year end of the plaintiff has been June each year. The profit and loss account in the audited accounts of the plaintiff classified the entirety of the declared fees as an expense item. In consequence, the profit of the plaintiff was substantially reduced by the amount of the declared fees. In the result, the tax payable by the company was reduced. In the balance sheet, the retained fees accumulated over the years would be classified as an accrual under current liability. However, and here is the source and origin of how the plaintiff ran afoul of the IRAS, the IR8A forms issued by the plaintiff, and signed by a director, would state only the paid fees that were released to the individual directors who, in turn, paid income tax on those fees. According to the evidence, Mr Ken Tan would decide and apportion the amount of retained fees to be paid to each director. He carried out the exercise just before the Chinese New Year.

9 At all material times, Mr Tan Tiong Lei[2] (“Mr Tan”), the director of the plaintiff in charge of finance and administration, knew the tax implications. So did Mr Ken Tan. Both of them were fully aware that the plaintiff had claimed the benefit of the declared fees as deductible expenses. They also knew that the directors had only declared as income the fees they had been paid and that no income tax was paid by any director for the retained fees which were earning interests for the plaintiff.

The 1992 and 1997 distributions

10 In 1992, the plaintiff decided to make an additional allocation of directors’ fees. The plaintiff’s accountant, Ms Katherine Yeo (“Ms Yeo”)[3] spoke to Ms Chan Sui Chan (“Ms Chan”)[4] of the defendant’s office and was advised that once the additional amounts to be paid to each director had been decided, such payments should be notionally spread over previous years and retrospective additional IR8A forms should then be prepared by the plaintiff to declare the directors’ fees for each of the respective years, even though the fees were not actually being paid in that particular year.

11 The plaintiff provided additional IR8A forms to the directors, who later submitted them to IRAS. Later, the IRAS informed the individual directors how much further taxes were to be paid, and the taxes were accordingly paid. These 1992 distributions from the retained fees (“the 1992 distributions”) escaped the imposition of any penalty, which IRAS could have properly imposed.

12 In 1997, Mr Ken Tan decided to make a further distribution of the retained fees. The exercise was carried out in the same way the 1992 distributions were done. The directors again paid the additional income tax without attracting anything untoward from IRAS.

13 The defendant, as the tax agent of Mr Ken Tan, dealt with the additional IR8A forms for him. For the year of assessment 1993, the defendant prepared Mr Ken Tan’s personal income tax return (Form B) and filled in the box “Part V – Income Not Previously Reported” the bonus and directors’ fees of Mr Ken Tan for the years 1988, 1990 and 1991.

14 In July 1998, the IRAS queried the plaintiff about the directors’ fees which had been declared and received for the year of assessment 1997. IRAS also asked whether the fees were shown in the IR8A forms and it sought a copy of the plaintiff’s profit and loss accounts. The defendant was asked by the plaintiff to reply to the IRAS. In August 1998 the defendant replied to the IRAS that the total directors’ fees of $2.544m had been declared and shown as expenses in the accounts for the year ended 30 June 1996 and that the total amount actually paid out was only $839,500.00.

15 Following additional queries from IRAS, in November 1998, Mr Tan and Ms Yeo had a meeting with the defendant. Pursuant to the defendant’s advice, the plaintiff held a meeting on 14 January 1999 to allocate and distribute all retained fees, amounting to some $6,552,839.00 among the four directors, to be related back to the years 1990 to 1997. After the distribution, the plaintiff furnished IRAS with additional IR8A forms for the directors for that period. As noted earlier, IRAS imposed the penalty as it was entitled to do.

Evidence of the defendant

16 The defendant stated in evidence that Mr Ken Tan, who was his former colleague in a trading house, asked him to take care of the plaintiff’s audit and income tax returns. On or about 1981, he started the audit work and worked as a tax agent for the plaintiff. At the same time, he was retained as a tax agent for Mr Ken Tan. But the defendant pointed out that he was not the tax consultant of Mr Ken Tan. He categorically stated that he was never the plaintiff’s accountant or tax consultant. The plaintiff had its own accountant, Ms Yeo. On the evidence, Ms Yeo prepared the IR8A forms in question which were signed by Mr Ken Tan. The defendant referred to a letter dated 1 March 1983 from the plaintiff informing him that he had been “appointed auditor of [the plaintiff] for the financial year ending 30 June 1983”. He replied in writing accepting the appointment.

17 The scope of his...